As shown increasingly by recent financial events, the mortgage industry continues to struggle with detecting and managing fraud. Lenders have come under scrutiny due to relaxed lending policies and vulnerable lending processes exposed to fraudsters. As a result, lenders are greatly concerned with the continued rise in mortgage fraud. Recent regulatory and political activities have added a new twist to operational concern—compliance risk. More than 70% of loan originations were facilitated by mortgage brokers in 2005 and 2006. Fraud committed by industry insiders has caused reported financial losses in excess of $1 billion to date. This figure alone illustrates that current fraud detection solutions are minimally impacting risk exposure for mortgage industry participants.
Currently, financial industry participants employ a number of systems that aim to detect fraud risks in an effort to prevent and mitigate fraud. Unfortunately, conventional systems, such as information verification tools, have yet to adequately and completely address the various types of mortgage fraudulent events. For example, conventional tools can be used in an attempt to verify information such as property values, names, social security numbers (“SSNs”), assets, and credit history provided during an application process. Despite the existence of existing, conventional automated tools, however, the mortgage industry and other financial industries continue to encounter a significant number of fraud occurrences.
Mortgage fraud typically occurs in two ways: fraud for profit and fraud for housing or property. Fraud for profit schemes typically result in ill-gotten gains from falsified or fraudulent loan transactions and usually involve industry insiders well versed in the funding process. The insiders that are typically parties to fraudulent schemes make it challenging to uncover fraudulent activities. Financial losses stemming from this type of fraudulent activity can be significant and devastating to industry participants. Examples of insider contributed fraud include, but are not limited to, illegal flipping, straw buyer scams, equity skimming, and fraudulent property investments.
Fraud for housing or property generally involves factual misstatements to obtain a property as a primary residence. This type of fraud contributes to the greatest amount of reported fraud. Common misstatements include embellishing salary or income amounts and undisclosed borrowed funds or employment terms. Borrowers are often coached by insiders so that reported data is represented more favorably and appears less risky to lenders.
In addition to the above mentioned mortgage-related fraud schemes, other common schemes are typically perpetuated by those participating in such illegal activities. For example, common mortgage application fraud plots include equity skimming/foreclosure bailout schemes, churning, chunking, shot-gunning, silent second, property flipping, double escrow, straw-buying, air loans, identification theft, asset rentals, mortgage elimination schemes, cash-back schemes, and non-arm's length transactions. These schemes are described below in more detail.                Equity Skimming/Foreclosure Bailout Schemes: Using money for reasons other than paying off loans. For example, when a borrower's property is in foreclosure, a seller purchases the property for a fee and promises to let the borrower continue to live on the property if the borrower deeds the property to the seller. The seller never pays the mortgage, the loan defaults, and the borrower is forced off the property. The seller walks away with a fee or with equity. The seller can then choose to re-mortgage or to abandon the property.        Churning: Refinancing the same property repeatedly in a short period of time. Interest rates, fees, and costs increase with each refinance. The loan officer can make a lot of money on one property because of the loan commissions associated with the constant refinancing. In contrast, lenders and borrowers pay more for the property than they otherwise would.        Chunking: A borrower purchasing multiple properties in a span of a few days. The concurrent debts do not appear on the borrower's credit report before the closings. This scheme is often perpetrated through seminars, or by approaching susceptible groups, such as those in nursing homes or churches. For example, a solicitor offers to sell a potential borrower multiple properties at once, for a fee. The solicitor promises to upkeep the properties, to lease the properties, and to make all payments on the applicable loans. After closing, however, the solicitor disappears with the fees. The borrower is left with mortgages on multiple properties, and the borrower's credit history may be destroyed.        Shot-gunning: An individual takes out undisclosed multiple loans on a single property simultaneously and then disappears with the proceeds. This scheme is often associated with foreign investors and organized crime.        Silent Second: A hidden second mortgage on a property. For example, a seller gives a borrower a second mortgage that is not disclosed to the borrow or to the lender of the first mortgage. To conceal its existence, the second mortgage is usually not recorded until after the closing. The seller receives the proceeds of the mortgage, and the borrower has to make the mortgage payments.        Property Flipping: A property sold a short time after a previous closing on the same property, where the second sale includes a significant, unwarranted increase in value. While it is legal to flip a property if appropriate improvements are made, flipping constitutes fraud when there is a significant value increase despite only minimal improvements to the property. A fraudulent appraisal is almost always involved. Illegal flipping can ruin the value of homes and neighborhoods. Further, lenders can lose money by providing large loans on over-valued properties.        Double Escrow: Two closings on the same property at once. For example, a borrower buys a property at one price and immediately sells the property at a higher price. Double escrow is a property flip with a shortened time frame, and is illegal if all terms are not disclosed to the involved parties.        Straw-buying: Using someone else's credit to secure a loan. The person whose credit is being used is the “straw buyer.” The perpetrating parties are often related. For example, if an individual's brother cannot secure a loan to buy a house, the individual can offer his own credentials to secure the loan for his brother. For another example, an individual with good credit may be approached and offered money to lend his name and good credit to multiple transactions.        Air Loans: All documentation is fabricated to secure a loan. There is no property and no borrower.        Identification (“ID”) Theft: Identity of a borrower or a mortgage professional is stolen and misused in a loan transaction.        Asset Rentals: Programs where assets, such as bank balances, cash, and strong credit card lines, are “borrowed” from their owners to make perspective borrowers appear financially sound. This scheme appears frequently on the internet. Usually, the asset “lenders” are compensated in some way.        Mortgage Debt Elimination Schemes: Fraudsters present faulty legal reasons why a particular mortgage or group of mortgages does not have to be paid. This scheme can be complicated and frequently appears on the internet. The Federal Reserve Board explains the scheme here: http://www.federalreserve.gov/boarddocs/srletters/2004/sr0403.htm.        Cash-back Schemes: A lender is deceived by a seller, a buyer, or both, as to the actual sales price of the property. An inflated appraisal is often involved to convince the lender to lend too much on the property. The proceeds are split among the perpetrators.        Non Arm's Length Transactions: Transactions where there is an undisclosed familial or professional relationship between a professional in the loan transaction and another involved party.        
Mortgage fraud can also occur in ways different from those discussed above. Indeed other types of encountered examples include: misrepresentations on a mortgage application, inflated appraisals, appraisals with inappropriate comparables, employment and/or income misrepresentation (for example, on pay stubs, W-2s, tax returns, or Verifications of Employment), failure to disclose debts and/or other liabilities, failure to disclose correct employment status, use of invalid borrower SSNs, fabricated or misrepresented monthly housing payments (e.g., rent or mortgage payments), falsified bank statements or accounts, falsified gift letters, occupancy misrepresentation (e.g., primary residence vs. investment property), incorrect transaction type (e.g., purchase vs. refinance), borrower and/or seller not properly listed on property title, misrepresented closing costs, or closing funds distributed to unauthorized parties, misrepresented down payments, and unauthorized activity by unlicensed professionals.
As is readily apparent from the above discussion, mortgage fraud occurs in many different forms. While some fraud schemes are known, new schemes are hatched by fraudsters in an effort to outpace detection efforts. Fraud schemes and fraudulent misrepresentations are financially detrimental not only to those involved, but are also detrimental to communities in which subject properties are located and financial markets as a whole.
What is needed, therefore, are mortgage fraud detection devices, systems, and methods enabling users to detect fraudulent activity so that measures can be taken to mitigate fraud risks and stop fraudulent activities before financial losses occur. It is to the provision of such fraud detection systems, devices, and methods that the various embodiments of the present invention are directed.